Is The Deflation Beast Nearby

The curse of deflation is that it increases the burden of debts. Incomes fall: debts stay the same. This way lies suffocation. It was bad enough in the early 1930s when US farmers faced a Sisyphean Task trying to meet mortgage payments on their land as crop prices kept sliding. They suffered mass foreclosure and fled West, as recounted in John Steinbeck’s Grapes of Wrath.

We forget, however, that overall borrowing was modest in the 1930s. The great credit bubble of the last 20 years has pushed debt levels in Britain, the US and other Western societies to unprecedented highs. UK household debt reached a record 165pc of personal income last year. This is almost 50pc higher than the burden at the onset of the recession in the early 1990s. Our sensitivity to debt deflation is therefore greater.

“It is going to be absolute murder in Britain if inflation turns negative,” said Professor Peter Spencer from York University. “The big difference with past episodes is that we are now much more heavily indebted. Few people owned their own houses in 1930s. Debts were miniscule.”

That’s just an excerpt from the article. It’s a short but poignant read. He ends by quoting monetary authorities who say that deflation is something that can be controlled. Their weapon of choice is to print money since there is no objective standard that regulates its creation. Let us hope that they are right.

Judging from the performance of economists and central bankers to date, I fear that their models and theories have somehow failed to account for the eccentricities of human beings.